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LONDON (Reuters) - Britain plans to contract out most of its criminal probation services in a move analysts say could be the start of a new wave of public services outsourcing to cut government spending.

Announcing the plan on Wednesday, the Ministry of Justice said that it spends 800 million pounds a year on probation services, the "majority" of which will be contracted out to private companies. The highest-risk offenders will remain under public sector provision.

Analysts had expected more government contracts in justice, defence and welfare to be opened up to private companies after Britain's coalition government came to power in 2010, intent on cutting costs to meet its budget deficit targets.

But the debacle when G4S failed to provide enough guards for the London Olympics last year, raised fears about the initiative and slowed the process.

Companies such as G4S, Serco and Mitie were disappointed in November when the Ministry of Justice scaled back plans to allow private firms to run prisons.

The process, however, now appears to be back on the government agenda.

"We can combine the expertise that exists within the public sector probation service with the innovation and dynamism of private and voluntary providers," Justice Minister Chris Grayling said while launching a consultation process on the reforms.

Jefferies analyst Kean Marden said that he expects outsourcing groups G4S and Serco to be frontrunners for the new work, though Mitie and a Sodexo-led consortium have also been linked to the contracts.

MORE CONTRACTS

Investec analyst Andrew Gibb said the news was positive for some outsourcing companies, but the 2015 start date could be problematic.

"There's always a hiatus around new contracts in an election year," Gibb said. "Any slippage and it runs into the next parliament."

Gibb said that previously flagged local authority contracts, such as the deal to run back-office functions jointly for three councils in West London, will be awarded this year.

He also expects further opportunities to arise in healthcare, where Capita, Interserve and Mitie have all made strategic acquisitions.

Justice Minister Grayling said that the probation service contracts would be on a "payment by results" basis, the method championed by Prime Minister David Cameron and in other government departments.

Grayling added that the model, whereby companies will be paid according to their success in keeping reoffending rates low, is not suitable for all areas of the justice sector.

Figures published in December for a flagship government employment scheme showed that the private companies, public sector organisations and charities involved had managed to find work for less than 4 percent of those referred.

Under the probation plans, offenders who have served less than 12 months in prison will also be subject to supervision. Grayling said that he plans to balance out this extra cost by encouraging new providers to bid for contracts.

"Through increased use of competition we can generate efficiency savings and drive down costs across the system," he added.

Serco, which operates Doncaster prison in the north of England under the model, already runs the first probation services contract in London. The contract is worth 38 million pounds over four years, though payment is not results-based.

Shadow Justice Secretary Sadiq Khan said that the model of payment by results is "untested" and that the plans posed a risk to public safety.

"Sometimes you just have to believe this is the right thing to do," Grayling said.